new projects and the business of Westerra. I consider that allocating 25 per cent of those expenses to Forest Creek would be
appropriate. That is consistent with the manner it was allocated
by Mr. McEvoy.

[47] The remaining difference is primarily a question of how to
allocate head office or overhead costs and whether or not they
can legitimately be charged against the Forest Creek revenues.
Generally, construction projects may be visualized as involving
direct and indirect costs of construction. Direct costs might be
items such as roof trusses, lumber, drywall or concrete utilized
for a particular building. Indirect costs might be such things as
toilet rental, equipment rental, security and clean up that relate
to all of the buildings under construction. These costs may
be thought of as the cost of building and in new home construction they are frequently measured in cost per square foot of
construction. They are a principal concern in estimating and in
pricing new homes. But a construction company must also cover
its costs of operation. These are head office costs such as telephones, office space, secretarial and administrative staff and
accounting.

[48] In the financial statements of the company the construction costs (both direct and indirect) will show up under “cost
of sales” resulting in a “gross profit” number. General office
expenses show up as “expenses” and are deducted from gross
profit to generate a number for “income before taxes”. The financial statements are helpful and they bear some relationship to
the question at hand but they do not answer it for two main reasons. First, the statement of income is a consolidated number
and is not broken out by projects. Second, the income statements
are compiled for the fiscal year which will not match the temporal scope of the project in question.

[49] Before delving into the evidence in more depth, it is
important to observe that the question of allocating head office
overhead to individual construction projects is frequently problematic and it is one that courts are frequently called upon to
determine. In most construction projects, the builder or contractor must calculate a price to the end user or customer based on
the direct and indirect costs of carrying out the construction but
they must also fix a price that covers overhead and profit. This
frequently comes before the court in claims for damages arising
from extras or delay claims. The question is how to allocate
general business expenses such as administration, payroll, and
accounting that are legitimately impacted by the extra work
or the extra time spent on a project.